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CVS Cigarette Ban Is Small Deal to Big Tobacco

NEW YORK (AdviceIQ) -- The CVS drugstore chain's plan to stop selling cigarettes by October has large symbolic value. But the decision's impact on its own business and that of the tobacco industry likely is negligible.

For CVS Caremark, the positive public relations might be worth more than any lost earnings. The day after the announcement, CVS stock rose 1%. The chain has been on a roll, with shares more than doubling over the past five years.

The largest U.S. drugstore chain by sales, CVS estimates it will lose more than $2 billion a year in revenue. It could be even more as tertiary sales of candy, soft drinks and the like are entered into the equation. But compared with overall sales of $123 billion, that $2 billion is not a lot.

On the surface, the tobacco companies appear to be on the losing end. They are pariahs these days. The cachet they used to wield -- remember the Winston Cup racing series and the Marlboro Man? -- are just distant memories.

But they actually are in pretty good shape. Convenience sales make up 75% of cigarette sales. True, cigarette use is dropping: Only 18% of American adults smoke, versus 42% in 1965. But the rate of the decline is slowing; it dipped just 2.3% from 2003 to 2007, the last period measured.

Meanwhile, increased prices have buoyed the industry's profitability. Turns out that there's little price elasticity for tobacco, meaning that a price hike doesn't translate into much of a drop in sales. As a result, profit margins for the three major U.S. tobacco firms are a nice 30% or higher.

No wonder Big Tobacco's stocks are doing well. Over the past five years, Reynolds American saw its shares more than triple. Altria and Lorillard doubled.

Still, the anti-smoking cause did get a publicity boost out of CVS' decision. In Indiana, where I live, and around the nation, the medical establishment was happy about it. William VanNess II, the Indiana state health commissioner, noted, "This is a strong public health intervention that will reduce the availability of cigarettes and other tobacco products and sends a message to all Hoosiers, especially children, that tobacco use is uniquely harmful."

"CVS' decision to stop selling cigarettes is a great move for better health," said Gary Brazel, chief medical officer of St. Vincent Anderson Regional Hospital in Anderson, Ind. "Cigarette smoking causes about one of every five deaths in the United States each year."

There are skeptics, of course, who argue that the government and retailers should let people do what they want. One non-supporter I know pointed out that he can buy junk food with zero nutritional value, but cannot buy smokes. "Who gets to decide what I get to use to kill myself?" he said.

The thing for investors to figure out is what is next? Will Walgreen, which has the largest number of drugstores, respond in kind? They clearly won't get the PR for saying "us, too." Some believe CVS made the move to remain a legitimate player in the future of health care. The chain offers on-premises clinics for customers.

The timing of the announcement is interesting. The historic Surgeon General's Report that indicted cigarette smoking for causing lung cancer just celebrated its 50th anniversary. The 2014 Surgeon General Report calls for a renewed focus on tobacco, the nation's No. 1 cause of preventable death and disease.

CVS' action does draw attention to the costly issues that surrounds cigarette smoking. The politicians and health industries have to be publicly supportive. How it affects the business cycle and earnings remains to be seen. But it may not matter.

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-- Joseph "Big Joe" Clark, CFP, is managing partner of Financial Enhancement Group, an SEC-registered investment advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of "Consider This with Big Joe Clark," found on WQME and iTunes. He is a registered principal offering securities and registered investment advisory services through World Equity Group, member FINRA/SIPC. Big Joe can be reached at bigjoe@yourlifeafterwork.com, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at here.

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